Trilemma Hypothesis: A Different Perspective on Turkey EconomyHavva Koç
The Trilemma Hypothesis continues to provide a macroeconomic framework with the trade-offs and challenges faced by policymakers, investors, and central banks. The Trilemma Hypothesis starting with Mundell-Fleming and developed by Frankel shows that in an open economy, the monetary authority cannot apply three policies simultaneously to achieve economic goals. It is important to examine the preferred economic policy in the short run in Turkey within the framework of the Trilemma Hypothesis. It aims to analyze the effect of the real effective exchange rate and total funding imposed by the Central Bank on net international investment position, direct investments, and portfolio investments during the period 2011Q2-2020Q2 in Turkey. The long-term relationship between variables was estimated by using the ARDL method. Findings of the study suggest that the Trilemma Hypothesis is valid for Turkey. In this study, choosing the central bank total funding rate as an expansionary monetary policy is of particular importance as it has not been encountered in the literature. In this context, it is thought that this original study can contribute to the literature.
Trilemma Hipotezi: Türkiye Ekonomisi Üzerine Farklı Bir PerspektifHavva Koç
Trilemma Hipotezi, politika yapıcıların, yatırımcıların ve merkez bankalarının karşılaştığı ödünleşmeler ve zorluklar hakkında, makroekonomik çerçeve sunmaya devam etmektedir. MundellFleming ile başlayan ve Frankel tarafından geliştirilen Trilemma Hipotezi; Açık bir ekonomide para otoritesinin ekonomik hedeflere ulaşmak için aynı anda üç politikayı uygulayamayacağını göstermektedir. Türkiye’de yakın dönemde tercih edilen ekonomi politikası uygulamasının, Trilemma Hipotezi çerçevesinde incelenmesi önemlidir. Türkiye’de 2011Q2-2020Q2 dönemleri arasında reel efektif döviz kuru ve Merkez Bankasının uyguladığı toplam fonlama ile net uluslararası yatırım pozisyonu, doğrudan yatırımlar ve portföy yatırımları üzerindeki etkisinin incelenmesi amaçlanmıştır. Değişkenler arasındaki uzun dönemli ilişki ARDL yöntemi ile tahmin edilmiştir. Çalışmanın bulguları Trilemma Hipotezi’nin Türkiye ekonomisinde geçerli olduğuna işaret etmektedir. Genişletici para politikası olarak merkez bankası toplam fonlama oranının seçilmesi, daha önce literatürde rastlanmadığı için ayrı bir önem teşkil etmektedir. Bu bağlamda literatüre, özgün bir çalışma olduğu için katkıda bulunduğu düşünülmektedir.
The explosive growth of international financial transactions and capital flows towards the end of the twentieth century has been one of the most comprehensive economic developments in world history. It has been instrumental in accelerating international capital flows, including economic liberalization in both industrial and developing countries and the trend towards globalization of trade.
When we look historically, in the Gold standard system which started to be implemented in 1870, all national currencies were automatically linked to each other with fixed exchange rates, as developed economies tied their national currencies to gold in a standard way. In this system that ended in 1914, the trilemma problem was solved by the free mobility of capital and by preferring a fixed exchange rate. As noted, the major virtue of the gold standard was its long-term price stability. Because the gold standard gave little discretion to the government to use monetary policy, gold-standard economies could be more vulnerable to monetary or real shocks.
In the Bretton Woods system, free movement of capital was abandoned, the independence of monetary policy and a fixed exchange rate regime were chosen. After the Bretton Woods system, with the independence of monetary policy and free movement of capital, the floating exchange rate regime was adopted. Furthermore, revolutionary changes in information and communication technologies have effectively transformed the financial services industry worldwide. Computer connections have allowed investors to access information on asset prices in real time at minimal cost while increased computing power has enabled them to quickly calculate correlations between asset prices and other variables. However, new technologies have made it increasingly difficult for governments to control the flows of international capital in or out of the economy whenever they want.
The effects of monetary and fiscal policy on the nominal exchange rate, interest rate, and output in the open economies where international factor movements were mutually free in the early 1960s were analyzed by Robert Mundell and Marcus Fleming. One of Mundell’s seminal contributions in the 1960s is that IS-LM is the derivation of the trilemma in the context of an open economy extension of the Neo-Keynesian model. The model considers the exchange rate regime and a small country that chooses financial integration with the global financial market. The analysis is significantly simplified by focusing on polarized binary options i.e., reliably constant exchange rate or floating exchange rate and full capital mobility or financial autarchy.
The Trilemma Hypothesis starting with Mundell-Fleming and developed by Frankel shows that in an open economy, the monetary authority cannot apply three policies simultaneously to achieve economic goals. Testing the trilemma hypothesis still remains attractive to developed and developing countries. Implemented economic policies seems to contradict the trilemma hypothesis in Turkey. For this reason, the econometric analysis applied to Turkish economy is important. So, it aims to examine the effect of the real effective exchange rate and total funding imposed by the Central Bank on net international investment position, direct investments, and portfolio investments during the period 2011Q2-2020Q2 in Turkey.
In the study, the long-term relationships between the real effective exchange rate and the central bank’s total funding rate, net international investment position, direct investments, and portfolio investments are modeled separately. First of all, the stationarities of the series were analyzed by ADF unit root test, and it was concluded that all series are stationary at level and do not contain unit roots. According to the ARDL bound test results, it was determined that there is a long-term cointegration relationship in all three models. The long-term coefficients and error correction term obtained were found to be statistically significant and compatible with the literature. According to the results, it can be said that the Trilemma Hypothesis is valid.
In this study, choosing the central bank total funding rate as an expansionary monetary policy is of particular importance as it has not been encountered in the literature before. In this context, it is thought that this original study can contribute to the literature.